I'm here to discuss risk taking. R-squared is for Ranting and Raving, R&R, as well as some more technical topics

Wednesday, March 16, 2011

FDIC Proposes Rule To Pay Bankers More

FDIC announced today that a proposed rule clarifying the "Orderly Liquidation Authority" would allow the FDIC to claw back compensation from senior managers and directors found substantially responsible for the failure of a bank.

[If the individuals in question didn't respond this way, then, by definition, they are risk seeking, rather than risk averse. We most definitely do not want to encourage risk seeking people to engage in bank management!!]

2 comments:

Absolutely not! I would, however, say that the potential to sue doctors means they are paid more, on the margin, because of malpractice risk.

The more interesting issue, however, is that doctors have may more draws off the distribution to identify poor performance. If I'm a cardiac surgeon, and I perform 100 procedures a year, an outside observer (like a jury!) has some hope of determining bad luck versus no skill versus gross negligence. Therefore, if I am a good surgeon, and I know it, and I have some degree of confidence in the legal system, then I'm not carrying too much downside risk that I cannot control.

A bank exec, as we've seen, could be completely incompetent from 2000 to 2007, and made the decision to quit in 2007, living his life out on the beach, versus a (potentially) brilliant bank exec who took over for the incompetent one at the end of 2007, who will look to anyone like a fool because we don't have enough information about his skill.

About Me

Since completing my PhD in economics at the University of Chicago, I have worked at financial firms ranging from the insanely large (JP Morgan) to the ridiculously small (my current venture has one employee!) with stops in between investing for McKinsey & Company, and Silver Creek Capital Management. I have served on company boards, both public and private.
You can reach me at marc@riskrsquared.com